Move over Amazon and iTunes, here comes Yahoo with the volume blaring. At least that’s a rumor that circulated late last week. Citing anonymous music industry executives, several reports claimed Yahoo is negotiating to begin selling DRM-Free music later this year.

A few days looking for more info has yielded no substantive confirmation and little further detail. From what’s available, it appears talks are real but early in process and delicate enough that nobody wants to compromise the discussions by sharing information. Still, as for logic, a deal makes sense for both Yahoo and the labels. There’s incentive for both sides to reach agreement. There’s a good probability something will be announced between the two; possibly by June, or sooner.

The Quick History: a DRM/DRM-Free Background
The Big 4 music labels (Universal, SonyBMG, Warner Music Group and EMI) represent the majority of music sold at retail, including online. Up until last year, they insisted just about every song of theirs sold online be encrypted with digital rights management software (DRM). This was argued as a necessary provision to protect against piracy.

One of the flaws in this approach was that consumer incentives were not aligned with consumer interests. Some facts:

•Though buying practices are rapidly changing, much of the music sold in the world is still sold on Compact Discs. CD’s have no encryption. They are DRM-Free and can play on any CD player, including computer drives. CDs also provide a high quality digital content which can easily be ripped to a digital file, copied, or shared (legal issues not withstanding) at the discretion of the buyer.

•Digital downloads, in contrast, are accessible online at any time which makes their purchase convenient. Often sold as singles and not full albums, they’re economical as well. But that convenience comes at the cost of quality and, especially, portability. Smaller digital files appropriate for downloads means a purchaser gets the music with lesser sound quality. And because the major labels insisted (until this past year) that downloadable music be encrypted with DRM, and there’s no universal, open-standard for that encryption, the music could only play on devices which were capable of decrypting the specific DRM encryption the music was encoded with (as opposed to universally on any MP3 player).

Consumers were willing to sacrifice quality but not interoperability (e.g. portability). They wanted convenience and the freedom to choose where to play music they bought.

The requirement for encryption, but lack of a uniform standard, made that impossible. Instead, it fragmented the retail marketplace and created islands out of digital music sellers. Sony’s Atrac format played on Sony Players. Music bought at iTunes played on iPods. Music sold in a Windows Media format, played on Windows Media equipped devices.

As the iPod became more and more popular, its market share drove customers to iTunes and reinforced Apple’s leading position as a music retailer. (See the Metue article on the Paradox of DRM or Steve Jobs open call for DRM-Free music for more information on this). Other stores, which were unable to sell music to iPod owners, couldn’t compete. Many of them, including Virgin Digital and Sony Connect, failed.

In 2007, the record labels, losing bargaining power with Apple over contract terms, and seeing CD sales continue to decline, seemed to realize the DRM-attached strategy had flaws. Since spring 2007, all four have implemented some form of DRM-free music sales.

The Case for YahooYahoo’s early music sales efforts, like Sony Connect and Virgin Digital, were a casualty of the DRM battle. Unable to sell to iPod owners, there was little chance to build momentum or establish any real sales traction.

Yahoo Music Unlimited, their current offering, remains but it is essentially an awkward Internet radio service. The service leases music to those who want to listen through their computer. At a cost of a about $72 a year, or $6 to $8 a month, a customer can pay for access to a streaming library, but, per their marketing language, it’s like Cable TV: “as long as you maintain your subscription, your songs are playable; if you end your subscription, the songs are no longer available.” With Music Unlimited, a costumer is renting, but when they leave, they’ll have nothing to take with them.

A new DRM-Free deal could fuel a significant turnaround for Yahoo Music. The portal remains a valuable high traffic internet destination. They keep detailed band information. There are interactive features, a licensed library of lyrics and a depth of content to keep and satisfy audience interest. What Yahoo hasn’t had is an affiliated point of sale capable of selling music to any buyer that will play on any device. A DRM-Free store would change that.

Yahoo Music, and its head, Ian Rogers, have long been critics of digital rights management (DRM). It kept sellers like Yahoo isolated and the marketplace partitioned. Now there is an opportunity for them to be reborn without the shackles. It makes sense for them to chase it.

The Case for the Labels
EMI was the first label to recognize that DRM encryption might not be the best approach for digital sales. Last spring, they broke ranks and began widely licensing their music in open, portable, unencrypted MP3 formats.

Universal Music followed suit in August. They also announced they would not renew their long term contract with iTunes. Instead, they chose to sell their DRM-Free catalog with other retailers including Walmart, Amazon, and others. The DRM-Free offering was classified as an “experiment” but the message was clear that they were looking to encourage new retailers and reduce the strength of Apple’s bargaining position. Portable music allows them to do that.

Following EMI and Universal , Warner Music and Sony BMG have also agreed to license their music without DRM encryption to Amazon’s MP3 store. All but EMI have shunned Apple with their DRM-Free agreements. Amazon is the only store with a library of DRM-Free music from all four, so far.

If the labels don’t eventually include other retailer partners all their effort will accomplish is a shift of power from one retail giant (Apple) to another (Amazon).

Commoditizing their business with multiple sales channels is an approach that insures no single retailer is all powerful. It’s the equivalent of being able to say in a negotiation: “we don’t need you Apple, we’ve got Amazon and Yahoo” or “We don’t need you Amazon, we’ve got Best Buy and Target.”

Yahoo has the volume of traffic and quality of infrastructure to immediately be a force in digital music sales. All they’re missing is the DRM-Free music. If the labels can come to terms to allow it, it will help them further balance the power disposition between themselves and the retailers.

It’s still an early stage rumor, but a Yahoo DRM-Free music store would make sense.